AFTER METCALF, CONTRACTORS MAY PURSUE SUCCESSFUL DIFFERING SITE CONDITIONS CLAIMS EVEN WHEN THEIR CONTRACT CONTAINS PROVISIONS THAT SEEM TO BAR RECOVERY
As was stated
above, the contractors lose about two thirds of these DSC claims. A recent case law may change this trend and
make it easier for the contractor to prove his case.
A recent decision
by the Federal Circuit Court of Appeals represents a major triumph for
contractors pursuing certain types of claims against the Federal Government. In
Metcalf Construction Co. v. United States,
742 F.3d 984 (Fed. Cir. 2014), the Federal Circuit reinforced the principles
underlying the Government’s implied duty of good faith and fair dealing,
reversing a trial court decision that would have made it exceedingly difficult
for contractors to show that the Government had breached that duty. The Federal
Circuit in Metcalf also
clarified that a contractor’s duty to investigate site conditions after
contract award will not prevent a successful differing site conditions claim
that arises from the Government’s pre-award representations.
Background
The project in Metcalf required the prime
contractor to design and build 212 military housing units at the Marine Corps
base in Oahu, Hawaii. The Request for Proposal ("RFP") included a
geotechnical report that indicated that the soil at the site had “slight
expansion potential.” The RFP indicated that the information in the soils
report was “for preliminary information only,” and it required the successful
bidder to conduct its own post-award site investigation. The Government stated
during pre-bid questions and answers that the contract would be modified if
unforeseen soil conditions were encountered.
After Metcalf
Construction Company (“Metcalf”) was awarded the contract, it hired a soil
consultant to investigate the site. The consultant concluded that, contrary to
the RFP, the soils exhibited “moderate to high” – as opposed to merely “slight”
– expansion potential. Because this heightened expansion potential could
adversely affect the stability of the constructed units, the consultant made
several recommendations for mitigating the soil conditions.
Metcalf immediately
notified the Government of the differing condition and requested permission to
follow its consultant’s recommendations. However, the Government insisted that
Metcalf follow the contract’s original construction requirements. Discussions
continued for over a year. Although still without an approved contract
modification, Metcalf pursued its consultant’s recommendations by
over-excavating and replacing the soil with imported fill. Subsequently, the
Government determined there was no differing site condition and refused to pay
Metcalf for the majority of the added costs associated with the issue.
Besides mitigating
unanticipated expansive soils, Metcalf had to remediate certain contaminated
soils at the Project site, despite the Government’s pre-award assurances that
no such remediation would be necessary. Although the Government ultimately
issued a change order concerning the contaminated soils, Metcalf claimed the
compensation was inadequate and failed to address the costs it incurred.
Metcalf also faced other disruptions and hindrances before completing the
Project several months past the contract completion date.
Metcalf
subsequently submitted to the Contracting Officer a claim seeking its costs
associated with the expansive soils and the other issues it encountered during
performance. In its claim, Metcalf argued that the Government had materially
breached the contract and the implied duty of good faith and fair dealing by
failing to timely investigate the findings of Metcalf’s soils consultant and
interfering with Metcalf’s work. After receiving the Contracting Officer’s Final
Decision denying its claim, Metcalf sued in the United States Court of Federal
Claims. The Government asserted a counterclaim for liquidated damages due to
Metcalf’s failure to meet the contract completion date.
Although the trial
court ruled in Metcalf’s favor on certain claims, it awarded the Government
more than $2.4 million in liquidated damages due to late completion of the
Project. The court also ruled that the Government had not violated the implied
duty of good faith and fair dealing, because the Government had not undertaken
“specifically targeted action” to gain the benefit of the contract or intended
to delay or hamper performance of the contract. The trial court also stated
that unless at least one factor is present, “incompetence and/or the failure to
cooperate or accommodate a contractor’s request do not trigger the duty of good
faith and fair dealing.”
Regarding Metcalf’s
differing site condition claim, the trial court ruled that the RFP’s
representations regarding swell potential and contaminated soils were excused
by Metcalf’s obligations to conduct a post-award site investigation. According
to the court, Metcalf was entitled to rely on the Government’s representations
only “for bidding purposes” and not “in performing the...project.” Metcalf
therefore assumed the financial responsibility for any differing conditions
encountered at the site.
The Federal Circuit
Reverses
Implied Duty of Good Faith
and Fair Dealing
The Federal Circuit
reversed, holding that the trial court applied the wrong standard in analyzing
Metcalf’s good faith and fair dealing claim. The Court held that to prevail on
this claim, a contractor need not show that the Government “specifically
targeted” the contractor. Rather, the contractor need show only that the
Government “interfere[d] with the [contractor’s] performance” and “destroy[ed]
the [contractor’s] reasonable expectations...regarding the fruits of the
contract.” The Federal Circuit emphasized that “a breach of the implied duty of
good faith and fair dealing does not require a violation of an express provision in the contract,”
and the Court sent the case back to the trial court to determine whether these
standards had been met.
Differing Site Conditions
The Federal Circuit
also rejected the trial court’s conclusion that Metcalf’s post-award duty to
investigate site conditions shifted the risk of any differing site conditions
to Metcalf, finding that this rationale misinterpreted the contract:
Nothing in the
contract's general requirements that Metcalf check the site as part of
designing and building the housing units, after the contract was entered into,
expressly or implicitly warned Metcalf that it could not rely on, and that
instead it bore the risk of error in, the government's affirmative
representations about the soil conditions. To the contrary, the government made
those representations in the RFP and in pre-bid questions-and-answers for
bidders' use in estimating costs and therefore in submitting bids that, if
accepted, would create a binding contract. The natural meaning of the
representations was that, while Metcalf would investigate conditions once the
work began, it did not bear the risk of significant errors in the pre-contract
assertions by the government about the subsurface site conditions.
The court examined
the purpose of the standard differing site condition clause, Federal
Acquisition Regulation (FAR) 52.236-2, which the court noted was intended to
“take at least some of the gamble on subsurface conditions out of bidding” by
enabling contractors to obtain contract modifications if they encounter
differing subsurface conditions. In that regard, the Federal Circuit confirmed
that provisions requiring a pre-bid site investigation (such as FAR
52.236-3(a)) have been interpreted “cautiously,” and that even those provisions
do not preclude a successful differing site condition claim, as long as a
reasonable pre-bid site investigation was actually performed. Similarly, the
Court held that the Government could not avoid liability simply because its RFP
indicated that the information was “preliminary.” The RFP and other pre-bid
information had advised bidders that they would be entitled to a change order
if they encountered differing conditions, and the fact that Government-provided
information was “preliminary” did not shift the risk of differing conditions to
Metcalf.
Metcalf’s Impact for
Federal Contractors
The Metcalf case represents an
important victory for federal contractors for at least two reasons. First, it
reversed the Court of Federal Claims’ narrow reading of the Government’s duty
of good faith and fair dealing. As a result, Metcalf
opens the door for potentially viable claims based on the Government’s failure
to cooperate or failure to properly administer the contract, even where the
Government has not breached an express provision of the contract or
“specifically targeted” the contractor.
Second, Metcalf reaffirms previous case law
regarding the federal differing site conditions clause and the contractor’s
duty to investigate. After Metcalf,
contractors may pursue successful differing site conditions claims even when
their contract contains provisions that seem to bar recovery. For example, contracting officers will often
use FAR 52.236-3, which generally requires contractors to investigate the site
pre-bid, to shield the Government from liability. As Metcalf and its cited cases
clarify, however, those clauses do not create a duty by the contractor to
investigate conditions beyond a reasonable degree, nor do they completely shift
the risks associated with differing conditions to the contractor.
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